Fidelity Life gets $100 million injection
The NZ Superannuation Fund is looking to take a 41% cornerstone stake in Fidelity Life.
Tuesday, October 31st 2017, 4:58PM 
19 Comments
The $36 billion New Zealand Superannuation Fund is proposing to take a minimum $100 million stake in Fidelity Life which would give it a 41.1% cornerstone stake in the company.
The transaction is subject to a number of conditions, some of which require action from shareholders.
Fidelity Life chairman Brian Blake, says securing the NZ Super Fund as a major shareholder will provide new capital which will enable the company to accelerate its growth strategy.
“Fidelity Life has experienced strong growth in recent years and this has outpaced our ability to fund the future rate of growth we’re aiming for without additional capital.”
“If our shareholders provide the necessary approval for the investment to proceed, the new capital will allow us to deliver on our future strategy providing strong, sustainable returns and growth over the long term,” Blake said.
Fidelity Life is privately held by more than 150 shareholders. The proposed investment is to be made up of $75 million of new shares issued to the NZ Super Fund at $115 per share; and the acquisition of a minimum of $25 million of existing shares. As part of the acquisition of existing shares, eligible minority shareholders (including all New Zealand resident shareholders) will have the opportunity to sell some or all of their shares to the NZ Super Fund for $130 per share. This offer does not extend to the Company's majority shareholders.
The NZ Super Fund will acquire shares from the Fidelity Family Trust at $115 per share.
“The NZ Super Fund is a great fit with Fidelity Life. We were both founded by Kiwis for Kiwis and are focussed on protecting the future for New Zealanders. The proposed investment represents a strong vote of confidence in Fidelity Life by New Zealand’s pre-eminent investor,” Blake said.
NZ Super Fund Chief Investment Officer Matt Whineray said: “This is a rare opportunity for the Fund to take a significant direct stake in a New Zealand life insurance company. The additional capital we are providing will support Fidelity’s long-term growth plans.”
Independent advisers Simmons Corporate Finance have concluded that the value of the Fidelity Life shares involved in the proposed transaction is in the range of $110-$130 per share and that the total value of the company is between $198 million and $220 million.
“This is an exciting future step for Fidelity Life. We have come a long way since we were founded in 1973. We have more than 100,000 customers and our products are distributed via a network of 2,700 independent financial advisers and through strategic alliances. This new capital will enable us to build digital capability to support innovation, productivity and improved support for customers, advisers and our partners,” Fidelity Life chief executive Nadine Tereora said.
Fidelity Life’s Board is recommending shareholders support the investment. Shareholders, including the Fidelity Family Trust, will vote on changes to Fidelity Life’s constitution needed for the proposal to proceed at the company’s Annual Meeting on 12 December. If the constitution is altered and other conditions are met settlement will occur after then.
Shareholders can expect to receive their voting papers with the Notice of Meeting on 9 November.
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Comments from our readers
This development, (taken together with Partners Life's earlier capital raising and AIA's purchase of Sovereign) seem to put permanent lie to one of the principal assumptions of the MJW authors in their infamous report.
When we met with them, it was clear to us that one of MJW's big worries was that the solvency of the insurance companies was at risk. At least implicit (and maybe even explicit) in what they told us was that the profit share of life company revenue NPV was too small because the commission share of revenue was too great (hence their "cut commissions" theme) and therefore the NZ insurers were not an attractive investment target.
As Ms Tui would say "Yeah right".
Just saw your last paragraph and my thought is that if the commission share of revenue is high then that simply lowers the NPV suggesting a lower price than would otherwise we the case. In fact you could turn the MJW argument around, if indeed that was their argument, that high rates of commission are a good thing because it lowers the NPV, lowers the price you pay then you can, theoretically anyway, reduce commissions or go to robo delivery and you generate higher profits.
Regards
Brent
1. I don't know what Fidelity's commission rates are. Not sure they are relevant in the same way as I don't think it is relevant to know what commission bonus rates Toyota pays its new car department staff!
2. To be pedantic, I should have said revenue PV only (not NPV).
3. The value of the company is including the new capital injection of $75 million I would have thought.
4. Since Fidelity is a 100% owned NZ company, it is not required to publish its accounts as far as i know.
5. My knowledge of NZFRS rules for financial statements of insurance companies is only cursory. But what I do know tells me it is a black art incomprehensible to ordinary mortals.
6. I can't imagine the Big Cullen Fund would be a generous purchaser in any event - they will have "Buy low" engraved on their hearts.
Fidelity does publish its accounts, net profit down 80% to $5.2 million. Published just yesterday in fact on Companies Office.
I think commission rates are hugely relevant…. firstly as a contrary indicator of value and secondly as a cross check on the attractiveness or otherwise of a product...particular those sold in the financial services area. At the risk of stating the obvious they are a contrary indicator of value because, all things being equal, the more commission that is paid to an agent the less of your money goes to actually buying the product. Therefore we can conclude, again all things being equal, that the less you pay for a product the less you receive. Obviously this doesn’t work all the time but as a general rule it is difficult to criticise. Commission costs are essentially distribution costs and Amazon is a good example of the value that can be delivered to consumers by a strategy of minimising distribution costs. Is it possible that Fidelity’s model, with huge commission costs, will potentially be displaced by technology and lose market share because it’s products will eventually be more expensive?
As regards “a cross check on attractiveness” this strategy has worked well for us in the past and is one of the reasons we avoided Feltex, finance company debentures etc etc. Here is another example...a while back BNZ sold some plain vanilla bonds...little or no commissions...a month later some deeply subordinated junk debt...about 1.5 percent commission paid. My simplistic view held on behalf of clients is : the higher the commission the less attractive the product is likely to be.
Now for some numbers for Fidelity: In 2017 net premium revenue was $124m and from this commissions of $69m were paid. Is that is an expensive distribution channel? Net profit after tax was $5.9m and the company is valued at $200m
You supply another one off analogy as "proof" when it isn't. It is a one off analogy.
In the MJW report, they had included suppliers who PAID NO COMMISSION to advisors. The cost of premium was no different, and in some cases more, than products supplied by commission based advisors.
If you look at page 2 of the Fidelity Life financial statements for the year ended 30 June 2017 insurance premium revenue is $234m and from that $110m is payable to reinsurers leaving net premium revenue of $124m. Commission expenses are $68.9m. Commission is therefore 55.6% of net premium revenue.
Regards
Brent
Even with the reducing number of providers, there are so many different definitions, wordings, benefit structures, claims experience, claims management (to name but a few), that assessing product merit by acquisition cost alone may well be doing the client a disservice.
I take your point. Although you say you can’t see a correlation between insurance commission levels and product quality common sense suggests that that should be the case. You also say bank risk products don’t have a commission element but I think that is incorrect. Companies like Fidelity pay commission as it provides a distribution channel and because banks have their own distribution channels this cost is equivalent to commission. Also I thought banks paid bonuses to staff for volume so again this is commission.
My initial thought was that because Fidelity pay so much in commission that the new money from the Super Fund might be directed toward some initiative to get those costs down and thus improve profitability. It will be interesting to see where Fidelity go now that the Super Fund owns 41%.
Regards
Brent
Commissions generated are, for most advisers, the same as fees to financial planners, i.e. revenue for their trading entities from which costs have to be deducted and not direct income to the adviser personally.
Bank staff who are paid salaries wouldn't know how much 'commission' is generated by a product sale if any and I doubt whether disclosure of this will be required going forward.
With commission levels so high and such a big component of costs it was pretty obvious that the Super Fund would be encouraging Fidelity to establish a new, lower cost, distribution channel. I’m sure Fidelity will still support advisors but the writing is on the wall.
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